Investment strategist: Economy should clear recovery hurdles

The path for the United States’ economic recovery isn’t free of imperfections, but John Augustine expects that the economy can continue negotiating the route.

“We think the economy, businesses and markets are going to keep moving forward,” the Fifth Third Bancorp chief investment strategist said Tuesday in an interview with News-Review staff.

Fifth Third staff in Petoskey brought Augustine, who is based in Cincinnati, to Northern Michigan this week to make a presentation to local clients and professional partners.

During Tuesday’s interview, Augustine noted several recent economic trends that he sees as encouraging.

For one, he said consumers have stepped up their participation in the economy. Although they’ve had to redirect some of their resources toward costlier gasoline, he noted that the overall spending trend remains positive.

In addition, Augustine noted that employment trends are improving, and that businesses are starting to spend cash that has accumulated on their balance sheets ­­— either by investing in operations or passing proceeds along to shareholders.

U.S. exports also have been on a growth trend, he said, setting a record in March.

Still, Augustine expects it will be at least three to four years before economic conditions return to the “normal” seen before the 2008-09 recession. He sees several challenges present for the economy.

Crude oil’s recent price climb is one. This spring, more expensive oil has been a key factor driving the price of the gasoline refined from it to the $4-plus range.

But unlike 2008 — the last year when gasoline reached that price territory — Augustine said wages and employment are now on a positive trend.

“We’re on a different economic trajectory than we had the last time we saw $4 gasoline,” he said, noting a belief that the fuel price trend shouldn’t reverse recent economic gains.

Another of the economy’s challenges can be found in the housing market. For the United States, Augustine noted that each previous economic recovery since the World War II era has been based on the strength of housing and automotive markets.

“Now, we’re only operating on one cylinder,” he said. “Vehicle sales are going up, but the housing market’s still slow.”

Following the burst of the housing market’s “bubble” in the past several years, the nation has had a surplus of available homes which has kept real estate values low.

Federal tax incentives for first-time home purchases — which expired last year — helped somewhat in reducing the quantities in the lower end of the market, Augustine said. The high-end housing market recently has shown positive signs as well, with Augustine noting that improvements are gradually working into the middle price range.

Overall, Augustine expects excess housing inventory will take another year or so to clear from the market.

Although the nation is now achieving a higher gross domestic product than during the previous economic peak, Augustine noted that productivity gains are allowing that to occur with 7 million fewer workers employed. To resolve the housing market’s challenges, Augustine said 3.5 million excess homes must be cleared from the real estate market, with 7 million people needing to line up work at the same time.

Public-sector trends also present a hurdle for the recovery, Augustine said, with various levels of government having fewer dollars to spend and shedding employees.

With the federal debt having reached its legal ceiling ­— and with Congress and President Barack Obama yet to iron out terms for raising that ceiling — some economic observers have noted concern that the debt default possible within the next few months could bring substantial economic disruptions.

Although he believes elected officials will continue with a recent trend of last-minute decisions ­— and wait until they’re “3 inches from a 600-foot drop” ­— Augustine’s expectation is that the debt ceiling will get adjusted.

But he also noted questions about the $14 trillion federal debt’s sustainability, and said a framework for trimming that debt is needed along with the higher limit for the short term.

To be effective, he said the debt-reduction strategies likely would make a wide swath of the public unhappy to some degree.

But if officials simply wait with regard to the debt issue, some foresee the market for government bonds taking a significant hit at some point and forcing more drastic debt-reduction measures. Augustine noted that this could present an even less enjoyable scenario for the nation.